CY
AN
MAGENTAYELLOWBLACK
Composite
Composite
C
M
Y
K
10 BARRON’SFebruary8,2 021
REVIEW
31,148.
Dow Industrials:+1,165.
DowGlobal Index:+21.
1.17%
10-yearTreasury note:+0.
LOGICFADESFOREXXONANDCHEVRON
HigherGround
Stocks rose,erasingtheprevious
week’s losses,fueledby theNasdaq
andtech.Earningswerestrong,ledby
recordquartersfromAlphabetand
Amazon.com.Oilgiantsreported
losses,includingExxonMobil’s $
billion.FordMotorandGeneralMo-
torswerehi tbyac hipshortage. And
Januarysaw amoderatepopinnew
jobs,afterseveralmonthsofdecl ines.
Fortheweek,theDo windustrialsrose
3.9%,to31,148.24;theS&P500,hitting
anotherhigh,soared4.6%,to3886.83;
andtheNasdaqsurged6%,to
13,856.30 ,alsoarecord.
The Downside
Hedge funds retreated fromshort
plays onGameStopand other high
short-intereststocks, and prices and
volatility thudded to earth.Investors
faced decisions onwhen, or if, to sell.
GameStop lost 80% andAMCEnter-
tainment,49%. Robinhood raised
another$2.4 billion from investors—
$3.4 billion in aweek. Day traders on
Reddit, meanwhile, dro ve silver up to
its highest point in eight years, then
saw it slip as theCMEGroupapplied
higher margin requirements.
Going Big
PresidentBidenmetwithGOPsena-
torswhoofferedareliefplanone-third
the$1. 9trillionhehadproposed;he
sugg estedcompromisewaspossible.
SenateDemocratsthencastthebillasa
budgetmatter,thusallowingastraight
majoritytopassit.Theadministration
says it willincreaseweeklyCovid-
vaccineallocationstomorethan
million,anduse40,000drugstoresto
distributethem.Johnson&Johnson
appliedforemergency-useauthoriza-
tionforitsone-dosevaccine.
A New AntitrustFront
Sen. Amy Klobuchar, head of the anti-
trust subcommittee, introduced a
comprehensive rethinking of antitrust
law, raising the pressure on BigTech,
particularly Alphabet andFacebook,
already facing federal lawsuits.
The Defense
Former PresidentTrump lost one le-
gal team for his impeachment trial,
BigOil:De al
OrNoDeal?
ExxonMobilandChevron, the two largest U.S. oil
companies, discussed a megamerger last year that
would lea ve the U.S. with oneoil giant for the first time
in decades, reportsThe Wall Street Journal. Adeal
would create a $300 billion or so company that could
produce seven million barrels ofoil and equivalents a
day, makingit the lar gest operator outside ofSaudi
Aramco.The Journal says talks are off, but could be
restarted. Both companiesdecl ined to comment.
That thepairevenconsideredmergingisasignofhow
much theindustryhaschanged. Talksreportedlybegan
asoilpricescollapsedlastyear.Priceshave sincere-
bounded.AnalystsworriedthatExxon’s cashflowwould
notco veritsdividend,whichhappenedin2019and2020.
Buthigherpricesandcostcutsma yallowittoself-fi-
nancethedividend.
In 19 99,themer gerofE xxonandMobilledtoaperiod
ofgrowth.“Therewerebignew[drilling]opportunitiesin
Venezuela,Qatar,Kazakhstan,andAngolathatrequired
capital,”wroteCitianalystAlastair Syme.“Mergerspro-
videdtheindustrywiththebalancesheetstocompete.”
Today, bigproducersarecuttingbackandfocusedon
reducingbreakeven le vels.And,asCFRA’s Stewa rtGlick-
manwrote,amergerwouldbeunlikelytod rive pricing
power, withthenewentit ywieldingonly7%ofglobal oil
production,15%ofU .S.refiningcapacity.Thatsaid,
strangerthingshavehappened.Exxontookahugelossin
thelas tquarter,itsfourthinarow.It’sfacingachallenge
fromactivis tinvestors,andanalystsareseekingways to
impro ve results.Talkscouldrestart.—Avi Salzman
39.1%
Percentage of the alcohol bev-
erage marketby spirits, up from
28% in 2000, and just behind
beer, at44%.
$39 B
Amountraised in116 initial pub-
lic offerings inJanuary, the high-
est since Dealogic began count-
ing in 1995.
610
S&P Global count of corporate
bankruptcies announced in
2020 through Dec. 13, most
since 2012.
$2.6 B
2020 online-brokerrevenue
from payment-for-order-flow.
To get Numbersby Barron’s
daily, sign up wherever
you listen to podcasts or at
Barrons.com/podcasts
THENUMBERS
HESAID
“Inventionisthe
rootofoursuccess.
We’vedonecrazy
thingstogether,
andthenmade
themnormal.”
Jeff Bezos ongiving up the CEO’s job at
Amazon.comto be executive chairman
apparentlyover disagreements onstrat-
egy and fees. Briefs from his new team
arguedit’s unconstitutional to impeach a
former president andit was his First
Amendment right to express his election
suspicions.The trial starts on Tuesday.
Annals of Deal-Making
The Wall Street Journal reported that
Exxon Mobil andChevrondiscussed a
$300 billion merger last year. Talks were
preliminary and could resume...The spe-
cial purposeacqu isition company frenzy
continued.FormerBoeingCEO Dennis
Muilenburg plans to raise$200 million
for a SPAC. Rocket makerAstra Space,
backed bySalesforce’s Marc Benioff and
former Google CEO Eric Schmidt;
Wheels Up, an online jet booker;Fertitta
Holdings, parent of GoldenNugget casi-
nos and Landry’s restaurants; and DNA-
testingstart-up 23andMe are merging
with SPACs to go public...Kraft Heinz
may sellPlanters Peanuts toHormel
Foods. Illustr
ationsbyElias Stein; AndrewHarrer/BloombergFebruar y8,2 021BARRON’S 31
FUNDPROFILE
Talking With George Smith andChris Pearson
Co-Managers, DavenportSmallCap FocusFund
in stock options and move on. This
strategy has enabled the fund(ticker:
DSCPX) todeliver an 19.4% fi ve-year
annualized return, besting 99% ofits
peers inMorningstar’s Small-Blend
category. The fund ’s 0.97% expense
ratio is belowaverage for an actively
managed fund.
Smith, 45,got his start as an ana-
lyst at Davenport in 1997 rig ht after
graduat ing from theUniversity of
Richmond with adegree in finance.
But his actual connection beganeven
earlier. “I had a relationship with a
brokerat Davenport & Co.when I was
in my teens,” he sa ys. “I had maybe
$500 in anaccount thatmy parents
started for me. Iwas veryinterested in
stocks, and I would call [my broker]
and badger him incessantly. The size
of my account was verymisaligned
with the amount ofattention that he
had to pay to me and thenumber of
calls that I put into him.”
Pearson, 36, alsowent to the Uni-
versity of Richmond.He got an intern-
ship at Davenport working for Smith
in 2006 and has been thereever since.
The two work with 10 long-tenured
analysts, andeveryone at the firm
invests in Da venport’s funds through
their retirement plan—roughly$
million ofwhich was in Da venport
Small CapFocus at the end of 2020.
“All of our employees continue to
be in vested alongsideclients,”Smith
says. “It creates an alignment of inter-
ests andaccountability.”
Insider ownershi pcan encourage
executivestot hink long-term and not
takeunnecessaryrisks with their and
fellowshareholders’ money for a
transitorypayout. Theaverage stock
in Da venport Small CapFocus’ port-
folio is currentlyabout 16%insider-
owned versus theRussell 2000’s 7%,
Smith says.
Controlling individual-company
downside risk is essential as the fund
is concentrated—typically holding
between 30 and 35stocks—so any
PhotographsbyJUSTINT. GELLERSONA Small-Cap Fund
WinsBig Without
Relying on Big Tech
O
ne sign of agood lea der is
commitment.In the busi-
ness world, that often
means someonewho
puts theirown money on
the line andsticks with a
company throughgood
times and bad.Few fund managers
are as committed as George Smith and
Chris Pearson ofDavenportSmall
CapFocus. Both have wo rked their
entire careersat parent firm Daven-
port & Co., a Richmond,Va.–based
broker and financialadvisor in busi-
ness since1863.
Looking for that same managerial
commitment in the companies they
hold iskey to theduo’s in vestment
strateg y. They seek small companies
with executives who act as “owner-op-
erators”—those with large insider
ownershipwho beha ve more like the
devoted founder of a business than a
hired-gun executive who mig ht cash
ByLEWISBRAHAM
Pearson, left, and
Smith lookfor small-
cap companies with
executives who act
as “owner-opera-
tors,” meaning those
with large insider
ownership. That
approach has led
DavenportSmall
Cap Focusto out-
perform competitors
over the past five
years, while also
seeing a lower le vel
of volatility.